How to Manage Share Dilution as an Early-Stage Startup

The how, when, and why of share dilution.

How do you plan for share dilution when fundraising? 

A share dilution (also called equity dilution) occurs when new shares are issued or reserved for existing shareholders. This can follow a fundraise or when an employee option pool is established.

In early-stage fundraising there are two common methods: SAFEs and priced rounds. A SAFE (simple agreement for future equity) allows you to raise money from an investor in exchange for future shares of stock in your company. With a priced round, you get a certain amount of money for a set number of shares based on the valuation of your company.

A conversion discount gives your investor a discount on the price per share when their SAFE turns into equity. For example, if your Series A investors are paying $1 per share, your SAFE holder may only have to pay 80 cents per share. Among Carta customers, the median conversion discount is 20%. In most cases, a valuation cap will be more dilutive than a conversion discount.

Often investors will ask you to create an option pool before issuing their shares so they are not diluted. Forecast the hiring plan 2 years out so you can decided the number of shares that will be awarded to the employees.

In the past, SAFE and convertible note models took significant time or money to build. Carta has built a SAFE and convertible note calculator that can help you model the potential equity dilution. It allows you to view your pre and post-money dilution before and after a future priced round and visualize your ownership at multiple future valuations.

The decisions you make as you raise funds can have a huge impact on how much you own and walk away with when you sell. 

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